Turkey in Rates Denial Gets No Reprieve as Yields Show Inverse

Updated on

The biggest drop in bond yields among emerging markets this past week is no reason to think Turkey has convinced investors it can avoid raising borrowing costs.

Even after a 64 basis-point decline, rates on the government’s two-year notes are 59 basis points above those on 10-year securities, an anomaly known as an inverted yield curve that has prevailed for an unprecedented 14 weeks. In 2011 and 2014, the yields displayed a similar pattern for more than two months as the central bank boosted borrowing costs by at least 350 basis points.

“This is rare in Turkey,” Bryan Carter, who helps manage about $360 million of emerging-market debt at Acadian Asset Management in Boston, said by phone on Wednesday. “It begs the question: Are we on the verge of another paradigm shift in Turkish monetary policy? The market is forcing the hand of the central bank” like in 2014, he said.

Central bank Governor Erdem Basci, under government pressure to bolster a slowing economy in the run-up to parliamentary elections on June 7, has avoided lifting rates despite missing his 5 percent inflation target. Turkey’s bond yields have risen more than in any other emerging market this year as analysts including Standard & Poor’s questioned the ability of the central bank to decide monetary policy.

The central bank lifted its year-end inflation projection to 6.8 percent from 5.5 percent on April 30. The last time the notes performed similarly was in January 2014, when policy makers convened for an emergency meeting and raised Turkey’s key rate to 10 percent from 4.5 percent to stem a rout in the lira. The inversion began a week before the rate increase.

Recovered Losses

Government bonds have recovered some of their losses along with the lira in the past week as investors bought 2.15 billion liras ($818 million) in one of the final debt auctions before the election next month, according to Kerem Baykal, a fund manager at Istanbul-based Ak Portfoy.

“It may be premature to erase all expectations of a possible rate hike later in the year,” Baykal, who helps oversee about $5.5 billion in equities and bonds at Ak Portfoy, said by e-mail. “Some investors will continue to expect a hike as long as inflation keeps accelerating like this.”

(To be sent the TURKEY CREDIT column, click here.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE